Private equity, spooked by Ant Group IPO suspension, eyes Chinese ‘hard tech’ sector in paradigm shift

  • Investors shift from internet companies to sectors such as AI, chips, auto tech, and new energy, in line with China’s focus on social stability and national security
  • Some China-focused PE funds are also diversifying into Asean countries

Investment funds are flowing away from consumer-internet companies and towards “hard-tech” in China as venture capitalists, funds and investors adjust their strategies to reflect the nation’s evolving focus on social stability and national security.

Some funds are also expanding their investments beyond China to hedge against derating risks among domestic companies, as persistent regulatory concerns and increasing geopolitical risk – arising from widening differences between Beijing and Washington – dampen optimism about China stocks.

“We have seen a paradigm shift in China’s private-equity industry from the consumer internet to the ‘hard-tech’ sector,” said Sean Xiang, founder and chief executive of Hong Kong-headquartered Hermitage Capital Group, a private-equity firm with US$1.5 billion in assets under management that focuses on investing in leading Chinese technology companies.

The hard-tech sector includes artificial intelligence (AI), automobile technology, semiconductors, cloud computing, new energy and high-end manufacturing, Xiang said.

“Over the past two years since the suspension of Ant [Group]’s IPO, global capital almost ceased to flow into China’s consumer-internet firms, such as online shopping, entertainment, mobile banking and the like,” he said.

Xiang, who founded Hermitage Capital in 2017 after working for JPMorgan for more than six years, has invested in pre-IPO rounds of financing in more than 20 Chinese technology companies. Among these, five were listed on US or Hong Kong stock exchanges, including Tencent Music, Lufax.com, 360 DigiTech and SenseTime.

Today, Xiang believes the winds have shifted away from internet companies for the foreseeable future, even though policymakers have signalled an end to a sweeping regulatory clampdown on the sector, a move that has brought some investors back into the sector.

“Hard-tech companies in China are likely to be the winners in the coming five years, as these sectors are strongly encouraged by the nation’s 14th Five-Year Plan,” said Xiang, adding that his company stopped investing in mainland Chinese consumer-internet companies in 2019.

“Regulators strongly encourage China’s hard-tech sector, as China is pushing for self-reliance in tech, particularly less reliance on the United States,” said Xiang.

Formally adopted on March 11, 2021, China’s 14th Five-Year Plan outlines the country’s ambitious plans for 2021 through 2025. It calls for cultivating advanced manufacturing industry clusters to promote innovation and foster the development of a range of technology industries, including integrated circuits, AI and cloud computing.

Hermitage is not alone in recognising and adjusting to the shift.

“China’s 14th Five-Year Plan prioritises innovation and technology independence as a strategic pillar to future development,” said Liang Heong Koh, co-head of the global family and institutional wealth unit for Asia-Pacific at UBS.

Despite the current challenging market conditions, tech and innovation will remain an important future economic growth driver, said Koh.

UBS has formed a team investing in new-economy entrepreneurs and companies in Asia-Pacific, with China as a focus. The bank sees opportunities in connecting new-economy companies with institutional investors and big family offices, and is optimistic about sectors such as AI, cloud computing and green technology.

High-end equipment, advanced materials, biotechnology and clean energy will be the core pillars of sustainable growth for China’s economy, according to Raymond Zhang Yue, chief executive of Zhong Shan Financial Investment, a Hong Kong-based investment arm of Jiangsu Province. Jiangsu, China’s second-largest province in terms of gross domestic product in 2020 after Guangdong, focuses on advanced manufacturing and biotechnology.

Xiang of Hermitage said some investment funds are also placing bets on tech companies in the Asean region, as investors remain temporarily more cautious about China.

“Over the past years, we had the idea to expand outside China, but we did not take it into action because we were fully occupied with mainland investments, and that performed very well,” he said. “But now we have decided to take action.”

The company, which has offices in New York and Shanghai, is eyeing Singapore and Thailand as investment targets. “The capital is in Singapore, but potential acquisition deals are in Thailand,” said Xiang.

Southeast Asia’s private-equity market has seen one of the most impressive turnarounds in its history recently, with deal value reaching an all-time high of US$25 billion in 2021, more than doubling the 2020 figures, according to a Bain & Co report released this month. The digital economy continues to roar ahead as tech-centric investment remains dominant in these countries, the report said.

Author: Peggy Sito, SCMP

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